Practise Questions (Optional)
(Note: As additional materials, the quick answers are given and assist you to understand concepts and some calculations. You are encouraged to work out procedures by yourself. You should review that week lecture notes and text chapter/s.)
1. List three types of traders in futures, forward, and options markets
1. (i) .................
2. (ii) ................
3. (iii) ...............
1. hedgers, speculators, arbitrageurs
2. A trader buys 100 European call options with a strike price of $20 and a time to maturity of one year. The cost of each option is $2. The price of the underlying asset proves to be $25 in one year. What is the trader's gain or loss?  ............
2. $300 gain
3.  A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option.
(i) What is the breakeven stock price, above which the trader makes a profit?  ……….
(ii) What is the breakeven stock price below which the trader makes a profit?  ……….
3. (i) $35; (ii) $20.
4. Which of the following is not true (circle one)
(a) Futures contracts nearly always last longer than forward contracts
(b) Futures contracts are standardized; forward contracts are not.
(c) Delivery or final cash settlement usually takes place with forward contracts; the same is not true of futures contracts.
(d) Forward contract usually have one specified delivery date; futures contract often have a range of delivery dates.
4. (a)
5. In the corn futures contract a number of different types of corn can be delivered (with price adjustments specified by the exchange) and there are a number of different delivery locations. Which of the following is true (circle one)
(a) This flexibility tends increase the futures price.margin rate
(b) This flexibility tends decrease the futures price.
(c) This flexibility may increase and may decrease the futures price.
(d) This has no effect on the futures price
5. (b);
6. A company enters into a short futures contract to sell 50,000 pounds of cotton for 70 cents per pound. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price above which there will be a margin call?  ………..
6. 72 cents;
7. A company enters into a long futures contract to buy 1,000 units of a commodity for $20 per unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be withdrawn from the margin account?  …………..
7. $22
8. Who determines when delivery will take place in a corn futures contract (circle one)
(a) The party with the long position
(b) The party with the short position
(c) Either party can specify a delivery date
(d) The exchange specifies the exact delivery date.
8. (b);
9. Which of the following is true (circle one)
(a) Both forward and futures contracts are traded on exchanges.
(b) Forward contracts are traded on exchanges, but futures contracts are not.
(c) Futures contracts are traded on exchanges, but forward contracts are not.
(d) Neither futures contracts nor forward contracts are traded on exchanges.
9. (c)
10. On March 1 the spot price of a commodity is $20 and the July futures price is $19. On June 1 the spot price is $24 and the July futures price is $23.50. A company entered into a futures contracts on March 1 to hedge the purchase of the commodity on June 1. It clos
ed out its position on June 1. What is the effective price paid by the company for the commodity?  ……….
10. (a)
11. Suppose that the standard deviation of monthly changes in the price of commodity A is $2. The standard deviation of monthly changes in a futures price for a contract on commodity B (which is similar to commodity A) is $3. The correlation between the futures price and the commodity price is 0.9. What hedge ratio should be used when hedging a one month exposure to the price of commodity A? …………..
11. 0.6
12. Futures contracts trade with all delivery months. A company is hedging the purchase of the underlying asset on June 15. Which futures contract should it use (circle one)
(a) The June contract
(b) The July contract
(c) The May contract
(d) The August contract
12. (b);
13. A company has a $36 million portfolio with a beta of 1.2. The S&P index is currently standing at 900. Futures contracts on $250 times the index can be traded. What trade is necessary to achieve the following. (Indicate the number of contracts that should be traded and whether the position is long or short.)

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